Daiichi Sankyo Company, Limited (4568) Earnings Call Transcript & Summary

[Interpreted] I am Manabe. Thank you for attending this briefing today despite the sudden notice. The information was released at 8:30 today. I will explain about the strategic collaboration with U.S. Merck for HER3-DXd, DS-7300 and DS-6000 using the presentation materials. Slide 3 describes what I will talk about today. First, I will explain the background and the significance of the strategic collaboration, followed by an overview of the collaboration. After the explanation, we will take your questions. Please refer to Slide 4. First, I will talk about the growth strategy of our Oncology business. In our fifth midterm business plan announced in April 2021, we set 4 strategic pillars for sustainable growth. Of this, the strategic pillars for growth of the Oncology business are: Pillar 1, maximization of 3 ADCs, which refers to ENHERTU, Dato-DXd and HER3-DXd; and Pillar 3, identification and building pillars for further growth based on new growth drivers following 3 ADCs and the selection of post DXd-ADC modalities, and we have been working on them. In April 2023, 2 years later, we updated the fifth midterm business plan and announced the latest forecast of achievement. We communicated that Oncology revenue is expected to achieve JPY 900 billion or more or 150% of the plan in fiscal year 2025. The development of 3 ADCs was progressing ahead of plan, and with the emergence of rising stars, DS-7300 and DS-6000, new growth drive candidates, the following 3 ADC, the R&D strategy was updated to 5 DXd-ADCs and Next Wave, with aggressive investment, JPY 1.8 trillion or 120% of the plan in R&D during the midterm plan period. Slide 5 shows the environmental changes since April when we updated the fifth midterm business plan. First, as a change in the internal environment, the DXd-ADC franchise has been making further progress. In particular, HER3-DXd, DS-7300 and DS-6000, for which we have agreed collaboration this time, have further enhanced their values with the accumulation of data. With respect to HER3-DXd, the success of the [indiscernible] 01 study presented at WCLC 2023 put on track the filing for regulatory approval and commercialization and we are moving to the stage to plan further maximization. With regard to DS-7300, confirming the data on small cell lung cancer in the Phase I/II study presented at WCLC 2023 and ESMO 2023, we are now preparing the further development plan in earnest. Regarding DS-6000 confirmed the ovarian cancer data from the Phase I study, which will be presented at ESMO 2023, we are preparing the future development plan in a full-fledged manner. In addition to these 3 products, we are also making steady progress in maximizing the value of ENHERTU and Dato-DXd, which are major contributors to the increase in projected Oncology revenue in fiscal year 2025. And DS-3939, our 6 DXd-ADC has also moved smoothly into the clinical stage. On the other hand, one of the changes in the external environment is intensifying competition in ADC development. We are proud that our DXd-ADC products, such as ENHERTU, with our proprietary DXd-ADC technology, have reaffirmed the great potential of ADCs. Many oncology companies are focusing on ADC development as we see at conferences such as ASCO 2023 and WCLC 2023 will be confirmed that competition for development is becoming even more intense. In light of these changes, in the internal and external environment, we believe that there is a growing need to increase our capacity resources and the capability to maximize the DXd-ADC franchise. Slide 6, I will explain why we chose a strategic collaboration. We are always looking for the best ways to deliver innovative pharmaceuticals to more patients more quickly in line with our corporate mission -- contributing to the enrichment of quality of life around the world and continuously creating innovative pharmaceuticals, addressing diverse medical needs. Given the changes in the internal and external environment, which I mentioned on the previous slide and the increasing need to expand capacity resources and the capability to maximize the DXd-ADC franchise, we have carefully reviewed which will deliver innovative drugs to more patients more quickly, development and commercialization on our own or strategic collaboration, and we decided that the strategic collaboration would be the best way. And with the collaboration, we'll be able to achieve a greater corporate value and product value. Slide 7, I will explain what we aim to achieve through the collaboration. For HER3-DXd, DS-7300 and DS-6000, we aim to leverage our partners' capacity resources and capabilities to develop more aggressive development plans, targeting broader patient populations, further accelerate development time lines and mitigate the risk of delays. We'd like to gain the opportunities to contribute to patients in more countries and regions than we could ever achieve on our own. In addition, we will further expand our resources to create a favorable cycle for sustainable growth. Specifically, would like to allocate resources appropriately to the sixth DXd-ADC, DS-3939 and the seventh DXd-ADC, which expect to be the next growth driver following the 5 DXd-ADC as well as the second-generation ADC DS-9606 and new concept ADCs. They are post DXd-ADC modalities and early-stage research projects. Thus, we will expand our resources to create a virtuous cycle for sustainable growth. Slide 8. I will explain about why we chose U.S. Merck as our partner. U.S. Merck is a world-leading oncology company with KEYTRUDA at its foundation. KEYTRUDA is the largest oncology product in terms of global sales in 2022, and is often used in combination with other oncology products in many cancer types. In addition, U.S. Merck has rich experiences in oncology, having a strong development capabilities in terms of capacity resources. We expect U.S. Merck contribute most to maximizing the potential of each of the 3 products in this collaboration. In addition, U.S. Merck has encouraged operations in many countries, regions and tumor types. So we expect the contribution to expand the reach of the 3 products to a wider patient population. Based on U.S. Merck's strength combined with our strength in science and technology and expertise in ADCs, we believe that we are the partners capable of creating the largest number of new standards of care. Furthermore, U.S. Merck has several successful global partnerships in oncology, and we believe that U.S. Merck is a partner with the highest potential to achieve what we aim to achieve through strategic collaboration. On top of that, we selected U.S. Merck as our partner because they have the highest valuation over 3 products, highest commitment to our success among the many oncology companies that have expressed interest. Next, I will give an overview of our strategic alliances. Please refer to Slide 10. Daiichi Sankyo will co-develop and co-commercialize HER3-DXd, DS-7300 and DS- 6000 with U.S. Merck globally, excluding Japan. Regarding various plans for the future, we will establish joint committees and development and commercialization strategies will be planned and implemented based on mutual agreement by the 2 companies. Please turn to Page 11. With regards to development, we will codevelop as monotherapy and combination therapy for the 3 products. U.S. Merck will be responsible for 75% of the first USD 2 billion of R&D expenses for each product. The companies will share R&D expenses equally thereafter. As for commercialization globally, excluding Japan, the 2 companies will co-promote and share gross profit and promotional expenses, et cetera. In Japan, Daiichi Sankyo will solely commercialize and pay royalty to U.S. Merck. As for sales booking, Daiichi Sankyo will book product sales in all countries and regions where Daiichi Sankyo has local operations, including Japan. Daiichi Sankyo will manufacture and supply all 3 products. Page 12 explains financial terms for strategic collaboration. Under this strategic collaboration, Daiichi Sankyo will receive up to $22 billion in total or JPY 3.3 trillion based on the exchange rate of JPY 150 against the U.S. dollar. Upfront payments will be $1.5 billion, respectively, for each of the 3 products, so $4.5 billion or JPY 675 billion in total. The timing and the amount of upfront payments we will receive for each product is described in the table on this page. Daiichi Sankyo will receive $0.75 billion upon contract execution and the same amount 12 months after execution for HER3-DXd, $1.5 billion upon contract execution for DS-7300 and $0.75 billion upon contract execution and the same amount [ 12, 24 ] months after execution for DS-6000. U.S. Merck may elect not to pay the 2 upfront payments of $0.75 billion each that are due after 12 months for HER3-DXd and after 24 months for DS-6000, respectively. If U.S. Merck [indiscernible] the upfront payments already paid, will be retained by Daiichi Sankyo and rights related to such products will be returned to Daiichi Sankyo. Received upfront payments will be deferred and booked as revenue, considering the estimated exclusivity period. In addition to upfront payments, Daiichi Sankyo will receive R&D expenses related refundable upfront payments of $1 billion or JPY 150 billion in total, including $0.5 billion for HER3-DXd and DS-7300, respectively. As I explained earlier, U.S. Merck will be responsible for 75% of the first $2 billion of R&D expenses for each product, compared to equal sharing U.S Merck will bear $0.5 billion more than Daiichi Sankyo. For HER3-DXd and DS-7300, respectively, $0.5 billion will be paid upon contract execution as R&D expenses related refundable upfront payments. Prorated portion may be refundable in the event of early termination of development for both products. As for DS-6000, U.S. Merck will bear $0.5 billion more than Daiichi Sankyo compared to equal sharing, but 75% of R&D expenses will be paid by U.S. Merck as they are incurred. Accounting treatment is not yet determined, so we will make the announcement at an appropriate timing in the future. Daiichi Sankyo will receive sales milestones of up to $16.5 billion or JPY 2,475 billion. Sales milestones for each product will be up to $5.5 billion. Received sales milestones really booked as revenue in the year of achievement. Please turn to Page 13. Today, we have explained our strategic collaboration for HER3-DXd, DS-7300 and DS-6000. Daiichi Sankyo will work to reach more cancer patients around the world and deliver new treatment options in a broad range of cancer types more quickly to maximize our contribution; so that we will realize a purpose contribute to the enrichment of quality of life around the world. That's all for my presentation. We will now entertain questions from the audience. Today, President and COO Okuzawa; CFO Ogawa; and Head of Global R&D, Takeshita, are also attending. Thank you very much.

[Interpreted] Now we are moving on to a Q&A session. First, Mr. Yamaguchi from Citigroup Securities.

[Interpreted] Yamaguchi from Citigroup Securities. U.S. Merck is a good partner, and I was surprised to see the big size of the deal. I have 2 questions. The amount of upfront payment is the same for all 3 products, including HER3-DXd right now. Could you please let me know peak year sales of each product based on the progress of each product if you're sharing that information with U.S. Merck? That's my first question.

[Interpreted] Ogawa speaking. As for peak year sales, you can find the size of the 3 products total sales in the press release. We don't have any other information we can disclose right now. The 2 companies will continue to examine and discuss the details of the development plans.

[Interpreted] Thank you. I have another question. As was mentioned in the presentation, for HER3-DXd and DS-6000, U.S. Merck may elect not to pay the 2 upfront payments. I think this is like a development milestone on whether development is going well as planned or not by them. Regarding this term payment, what will be discussed about the possibility for U.S. Merck to elect to pay or not to pay?

[Interpreted] Yes. Regarding the terms and conditions for U.S. Merck to elect to pay or not, we don't have the information we can disclose. The timing will be 12 months after execution for HER3-DXd and 24 months after execution for DS-6000. That's all we can disclose for now.

[Interpreted] Understood. Lastly, I want to hear Takeshita-san's personal impression, which product out of the 3, do you think we'll have the biggest peak year sales in your view?

I believe the question was that of the 3 [indiscernible] we have, which one is the most [indiscernible] Is that the question?

Yes, for you.

Okay. So from a clinical standpoint, I have to say that all 3 are very, very promising and [indiscernible] drugs, each with its own different development path. And currently, if we look at the package of clinical trials that we are doing, they were all very attractive. I think there's -- from a [indiscernible] number standpoint, I do know the HER3 program is targeting [indiscernible]. And I think you're aware that there are so many more [indiscernible] from most of the other examples that we are thinking about. So most recent numbers, maybe HER3 is most important. In terms of the breadth of [indiscernible] 7300 program [indiscernible]. But right now, I think the 2 earlier stage programs, 6000 and 7300, we have a lot to do before we really understand the potential of those 2 [indiscernible]. I hope that answers the question.

[Interpreted] Lastly, I want a few words from Manabe-san. I'm sure you have had lots of discussions with the top executive of U.S. Merck. You have a relationship-- with the [indiscernible] top executive of AstraZeneca as well. This time, you have formed a collaboration with U.S. Merck. What about the relationship [indiscernible] the top executive or U.S. Merck? I received another e-mail today saying that the Japanese national flag is hosted at the headquarters of U.S. Merck right now, and expressing hope to work together with us to deliver these 3 assets to patients as soon as possible. I think a lot of respect is shown to us, including R&D capabilities of Daiichi Sankyo. That's all for me. Thank you very much.

[Interpreted] Next, Mr. Wakao from JPMorgan Securities.

[Interpreted] This is Wakao, JPMorgan. Congratulations on a great deal. I have several questions. First of all, please tell us a little more about the background of this collaboration and why you selected U.S. Merck? I would like to know if it is correct that you brought the 3 products as a package to each potential company in the first place. And when did you start working on collaboration? I'd like to know more about Merck's valuation and commitment to success that you told they were high. But I would like to know what Merck appreciated? And what do you mean by commitment to success? I would like to know a little bit more about them.

[Interpreted] I'd like to take that question. This is Manabe. We have received offers from several companies. Each of them had different interests and different things to offer in collaboration. As I mentioned today, if you look at what we have presented today, including financials and the global development capability, capacity and resources, I think you will see that our products have been evaluated quite favorably. And as I mentioned earlier, their respect for Daiichi Sankyo's products, the company and R&D capabilities was most evident, so we made a comprehensive decision. Although it took some time, we had further internal discussion and finally selected Merck. I hope I answered to your questions.

[Interpreted] When did it start?

[Interpreted] I told you that it took some time, but there were various offers from the very beginning. And as I said, there were several at different times. So I think you can understand very well.

[Interpreted] Thank you very much. Secondly, I got the impression from what you said this time that the timing of the launch of each product, the number of indications and the profits to be gained in a view all be greater than if your company were to develop and market each on your own, is it correct? Also, for each product, can you tell me about the color of the changes that can be obtained from the collaboration, if there are different from each other. For example, I would like to know what color in terms of the breadth of the expansion of indications, 7300 is the most promising or in terms of the timing of the launch, it is 6000 and so on?

[Interpreted] Yes, in the second part, if you look at the amount for all 3, they were evaluated at the same amount. So I believe that they were evaluated equally, although they are in different phases of the progresses of the trials. And sorry, may I have the first 1 repeated?

[Interpreted] Am I correct in understanding that the profit to be gained in each case will be greater than if your company want to go it alone?

[Interpreted] Yes, we would like to work under that assumption, including clinical trials.

[Interpreted] Understood. Finally, I'd like to know the impact on the current midterm plan, in particular, I believe that will be in the profit expansion phase from the next fiscal year. I think this collaboration is very advantageous to you in terms of the development costs. So I was wondering if there is no particular change in your midterm plan or rather, if there is a possibility that some of the development investment can be carved in the short term and the profit could rather go up.

[Interpreted] We believe that we'll be able to achieve the projected targets for FY 2025, the final year of the fifth midterm business plan, which we presented in April of this year. The detailed impact of the collaboration on the fifth midterm plan is still under scrutiny, and we will provide you with further information when the details are finalized. As for the R&D expenses, you pointed out, Merck will pay 75% of the expenses up to USD 2 billion in the contract. So I believe that this is a very beneficial contract for the management of our overall R&D expenses.

[Interpreted] Understood. That the next fiscal year is the profit expansion phase, that will not change. Is that correct?

[Interpreted] That's correct. There will be no change.

[Interpreted] Next question. Mr. Muraoka, Morgan Stanley MUFG Securities, please.

[Interpreted] This is Muraoka, Morgan Stanley. I have the impression that in this deal structure, the sales milestone is quite heavily weighted. Compared to the past 2 cases, it is an even greater rating in the sales milestone than [indiscernible] . Can you give me a little more background here? I wonder if you backloaded them because there are still a lot of Phase I or if the potential is so great that the total of the 3 is several billions of dollars, it says here. But looking at the amount of sales milestones, I wonder if it is a mistake of $10 million. Please give us a background to the extent you can.

[Interpreted] There are no development milestones this time, but this is a result of the contract negotiations. And it is a result of our consideration on the forms of milestones to maximize their 3 products. That's the background. No more -- there is no milestones for the R&D, but we will receive R&D expenses related upfront payments.

[Interpreted] The sales milestones are quite significant. In terms of rate, either because you make many detailed steps or because each step is very high, can you comment on that?

[Interpreted] We have nothing we can disclose about the details at this time. I have to say the details or the milestones for each amount of sales are set up with various tiers.

[Interpreted] Understood. As to how you proceeded with the contract, I have a follow-up question of [indiscernible] that I remember seeing the overall of more than 50% of 7300 at WCLC, and I thought it was amazing. Is it correct to think that the deal went ahead at once when the data was presented at WCLC?

[Interpreted] As I explained, we have been discussing how to deliver our assets to patients as quickly as possible and how to maximize them. So it was not a sudden change in strategy in such a short period of time, but it is a result of the continuous discussions.

[Interpreted] I see. Lastly, I believe that cash will accumulate again due to the large amount of upfront payments, and that cash will also increase during the profit growth phase starting from the next fiscal year. Including the concept of capital efficiency, you have indicated the possibility of buybacks in the midterm plan. So please tell us, what do you intend to do with the cash that we will accumulate?

[Interpreted] We will continue to invest aggressively for growth in [ Avante ] and manufacturing, and we take into account working capital needs for cash. And in line with the shareholder return policy outlined in our midterm plan, we will enhance returns to shareholders. We will announce our future plan for cash allocation at the appropriate timing after we have finalized it while keeping an eye on our performance and other factors.

[Interpreted] Next question is from Mr. Tsuzuki, Mizuho Securities, please.

[Interpreted] I am Tsuzuki, Mizuho Securities. Thank you very much for your explanation. I just have one point. DS-7300 is currently focused on small cell lung cancer. And you will expand into other cancer types and DS-6000 is focused on renal cell cancer and ovarian cancer. I would be very happy if you could give us a time line of when the other cancer types will be decided?

[Interpreted] Please answer much as you can, Mr. Takeshita.

Yes. We are already currently exploring other indications for both 7300 and 6000. And as we accumulate more data, we will be able to disclose that to you. I anticipate that it's going to be in the very near future, I think because we are generating interesting data as we did. And some of the data, of course, will be presented [indiscernible] this season.

[Interpreted] By in the near future, do you mean next year? Or sorry, maybe I can't ask such a niche question. But, do you envision that we will know what kind of cancer for example, in the next year or so? Or will it take a few years?

Okay. I cannot give you a specific date, but I do not think it will take several years [indiscernible] couple of years.

[Interpreted] Next question is from Mr. Mamegano, BofA Securities.

[Interpreted] This is Mamegano, BofA. Congratulations today. I think it's a great deal. I'd like to ask you about the potential of the 3 products. Looking at upfront payments of the contract, it is divided into 2 payments. And from Merck's perspective, it includes an option right. It is more like a development milestone. But for DS-7300, it would be received in lump sum. Concerning this, I think they have a high expectation for 7300, in my view. And this order I mean, HER3-DXd is next year, and DS-6000 is 2 years later. I wonder whether Merck wants to make a decision after seeing the data, if you could give us some comments, please?

[Interpreted] I can only say that it is the results of the contract negotiations. As I mentioned earlier, on each product, U.S. Merck and we agreed to this kind of results, having reviewed each product stage of development, what is running, what we can see and further potential. I don't think there is anything more I can explain to you.

[Interpreted] Understand. I'd like to change my question a little bit. Is there any data timing around here? Like a year later for HER3 or 2 years later for 6000? If we have any planned, please let me know. Please answer this as best as you can, Takeshita-san.

I'm sorry, can you repeat the question?

HER3-DXd is supposed to receive the remaining USD 750 million after 1 year. So I am wondering if there will be some kind of clinical trial data available after 1 year. Please let me know if there is some kind of a milestone or any clinical trial events?

Okay. I understand the question is about the HER3 program. And as you know, our initial indication for HER3 is the EGFR [indiscernible] non-small-cell lung cancer people [indiscernible]. We have already announced that the result, I think the results we have already seen with conferences and we are preparing the [ BLA ] for that now. [indiscernible] additional plans to further from the client front [indiscernible]. You can also see that because HER3 and HER2 also co-expressed at [indiscernible]. There is a large number of potential [indiscernible] for HER3 [indiscernible] . So these are [indiscernible] clinical -- that we will be doing, and that will likely be [indiscernible]. I hope that answers your question.

[Interpreted] Next question. Ms. Sogi, Sanford Bernstein.

[Interpreted] Congratulations on this great deal. I have a couple of questions. Regarding the 3 ADC assets covered by this deal, we believe that we are at the stage where it is difficult to get a full picture of clinical program from the data of Phase I and Phase II to the later stage, including HER3-DXd, which is the most advanced. I'd like to know what you are thinking about this point. And also based on this, with Merck, several Phase II clinical trials will be conducted in the future to determine which cancer types and patient types these products will be developed full as a result of this collaboration, is this understanding correct?

Yes. So I think in terms of clinical data already announced and presented at conferences, you are correct that the HER3 program is the most advanced where we can clearly see the path for registration in the EGFR [indiscernible] non-small-cell lung cancer [indiscernible]. However, we do have a [indiscernible] data in many other cancers [indiscernible] but also the 7300 and 6000. These are not yet publicly announced or disclosed data, but this is the data that we have discussed with our market partners. And based on these [indiscernible] we have created a clinical development plan that in some cases or in many cases, [indiscernible]. So these are really clinical development plans that are based on the currently available clinical data -- available as of today, which is different from the amount of clinical data that is already in public [indiscernible] .

[Interpreted] Looking at the upfront payment terms, it overlaps with Mamegano-san's question, but I understand that the expectation for DS-7300, different compared to others, HER3-DXd for which there is already quite a bit of data available. But do you think that Merck considers the risk to be low for 7300 or it has high expectations? Could you give us some background on this?

[Interpreted] We have been asked this question on this point repeatedly, and I think you may not be satisfied with the answers. But I believe that they have consequently evaluated all 3 highly in total. Each phase is different. As Takeshita mentioned earlier, we'll be able to tell you when the top line will be released. So if you put the top line results of R&D and the payment side by side, you may get different answers, but you'll be able to see it. Allow me answer in this way.

[Interpreted] One last question. You have collaboration track record with AstraZeneca, but you choose Merck as a partner. Having listened to your discussion, I understand that Merck is a great partner. But the reason why you didn't choose AZ. Is that -- for example, AZ is developing ADCs targeting [indiscernible] which is, of course, a different target, but it is very close to the target of DS-7300? Is it one of the reasons you didn't partner with AZ?

[Interpreted] I can't give you specifics, but we received proposals from several companies, each in a different form of proposal. Among them, we choose one based on which proposal would maximize our 3 products the most.

[Interpreted] Next, Mr. Tony Ren from Macquarie.

Congratulations on the Merck deal. Just a quick clarification question from me. Maybe I'm not understanding this correctly. There appears to be a small discrepancy between the press releases from you guys and Merck. In your press release, you said for, I hope I'm pronouncing this correctly. [ Rau Datatec, ] DS-6000, Merck will be responsible for 75% of the first USD 2 billion of R&D expenses. Now if I look at your English slide presentation, Slide 11 and 12, there, you said Merck will be responsible for 75% of the first USD 2 billion of R&D expenses for each product and appears to refer to HER3-DXd and 7300. So I just want to see if my understanding is correct? And if there is indeed a discrepancy? And the other question is that I do find this arrangement a little bit more complex than usual, especially with the -- basically the USD 1 billion worth of refundable R&D from payment. And I just want to see if you could provide a bit more color on that. So first one is about the discrepancy in language. And then the second one is about the refundable R&D related front payment, which is not something that typical I see, please.

[Interpreted] First of all, sorry for the confusion between the Japanese and English version. We apologize for that. Regarding the thinking behind the R&D expenses related refundable upfront payments, setting aside the upfront payment portion for now, Merck will be responsible for 75% of the first $2 billion of R&D expenses for each product according to the agreement. For HER3-DXd and DS-7300, $0.5 billion will be paid, respectively, upon contract execution as R&D expenses related refundable upfront payments. In other words, a total of $1 billion will be paid upfront. Regarding the ratio of 75% versus 25% after the first $2 billion of R&D expenses, the same is applicable to DS-6000 as well. For DS-6000, 75% of R&D expenses will be paid by Merck as they are incurred.

Okay. Great. Yes. So I am in Madrid for the ESMO conference, and I look forward to seeing your data presented on Sunday and Monday for these assets. Congrats again.

[Interpreted] Next, Mr. Muraoka from Morgan Stanley Securities.

[Interpreted] Sorry, this is my second time. I believe the proposal from U.S. Merck was the most attractive to you. This will enable you to grow these assets bigger at a faster pace. Could you please elaborate on the specific details such as a certain proposal or a combination you found attractive? If it possible to share some episodes, if any?

[Interpreted] It's difficult to respond. But Muraoka-san, if you were in a position, you would also have chosen U.S. Merck, correct?

[Interpreted] If you say so, I would say U.S. Merck is a good partner. What kind of an attractive proposal did you receive? As an outsider, I cannot fully imagine what it's like. I try to imagine, but it's just my imagination.

[Interpreted] As I touched on this a bit during my presentation, we'd like to deliver a variety of new standards of care. As you know, by doing additional combination studies, for example, U.S. Merck is already providing a lot of standards of care, which we have found very attractive.

[Interpreted] Understood. This may be the same question from a different angle. But developing these 3 assets in combination with KEYTRUDA for first-line NSCLC, for example, can be a possibility? In other words, development, which can compete directly against Dato-DXd could possibly occur?

[Interpreted] Takeshita-san, could you respond as far as you can?

Yes, I think it is a possibility that we may look into non-small-cell lung cancer [indiscernible] one or more of these 3 assets with KEYTRUDA [indiscernible] depends on really what is the clinical data has done. And we do wish to take our best [indiscernible] drug into the lung cancer patients. [indiscernible]

[Interpreted] Understood. At any rate, I also think it's important to maximize the overall asset value. I hope you will find the best answer for the sake of the patients.

[Interpreted] Next, Mr. Barker from Jefferies Securities.

Steve Barker from Jefferies. I have 2 questions about the financial arrangements. So I understand that you are booking JPY 3 billion or you will -- sorry, you will receive [ JPY 3 billion ] upfront payment upon execution of the contract, but that will be recognized as revenue over the exclusivity period. So for example, it's the HER3, if you think it's got a 15-year patent life time, then you will start booking that revenue from this quarter over 15 years. So that's the first question. And then the second question relates to the USD 1 billion of refundable R&D related to the first 2 assets. Can you just explain how we should think about that. Is that money that it's cash that's going to come in, but then you have to pay it back? Or is it revenue. Some details, please?

[Interpreted] Regarding how to book upfront payments. As we touched on this during the presentation, received upfront payments will be deferred and booked as revenue over multiple years, considering the estimated exclusivity period. For DS-6000 and HER3-DXd, there will be upfront payments, 24 months and 12 months after execution, respectively. From that timing onwards, these payments will also be deferred and booked as revenue. In this case, time passed since the contract execution will additionally be taken into consideration for deferred booking in the first year. As for your question about R&D expenses related refundable upfront payment, accounting treatment is not yet determined as of now. As soon as we decide, we will announce it to you As for HER3-DXd and DS-7300, $0.5 billion respectively, will be paid. 25% portion of R&D expenses will be paid by using these R&D expenses related refundable upfront payments. However, accounting treatment is yet to be determined as of now .

[Interpreted] Ms. [ Harita ] from UBS, please.

[Interpreted] Harita from UBS speaking. I have just one question. U.S. Merck has a lot of experience in oncology. There are ADCs like TROP2 and [indiscernible] ADCs, but U.S. Merck does not have ADC assets so much. U.S. Merck is evaluating your ADCs very highly. How are you planning to share capabilities related to R&D for ADCs? Allow me to ask you this broad question.

So this agreement includes some very limited amount of collaboration after repo level. And really those involving the same target as [indiscernible]. There's no fundamental reset collaboration on ADC in general. [indiscernible] Those may be part of the [indiscernible] 6000 to be [indiscernible].

[Interpreted] Mr. Yamaguchi from Citigroup Securities.

[Interpreted] As this was mentioned a few times during Q&A, I want to confirm. Originally, you are planning to develop HER3-DXd on your own and consider how to handle the 2 other assets. We spent a long time and decided to include all the 3 in this collaboration. This time, there was no option to develop HER3 alone just by yourself and consider partnering for the other 2 assets.

[Interpreted] We discussed a variety of options and reached this stage as a result. There were a variety of offers like covering 2 assets, 3 assets and so forth. You can understand this way.

[Interpreted] This is going to be the last question. Mr. [ Yamada from Nihon Keizai Shimbun. ]

[Interpreted] Yamada from [ Nihon Keizai Shimbun ] Speaking. Just one question from me. As part of the background for this collaboration, you mentioned changes in the business environment. As was mentioned, Daiichi Sankyo has paced the way for ADCs. As a result, ADCs are drawing more attention. Under these circumstances, the competitive environment is intensifying, as you said. This time, you need collaboration because competitors are developing their ADCs at a faster speed. So have you judged that it will be necessary to collaborate with U.S. Merck to increase the speed of your development? Can I ask you about the link between the intensifying competitive environment and this collaboration in detail?

[Interpreted] First of all, with this collaboration, we want to increase our speed. This is what we are always thinking about. As for competitive environment in the stage of clinical trials, if the target is the same, it's quite difficult to recruit patients. In these areas, we think competition is intensifying .

[Interpreted] Now time is up. We are closing this meeting. Thank you very much for your time today.

[Interpreted] Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]